Question

Identify sources of (and strategies for obtaining) monopoly power. Try these problems: 13, 23

Short answer

The existence of an economy of scale, governmental constraints, legal obstacles, etc., are all causes of monopolistic power.

Step-by-step solution

Monopoly power

Monopoly power is the ability of a corporation to operate as a price maker instead of a price taker; it is a capacity that practically all enterprises have. Monopoly power develops when one company controls an overall market. The U.S. government opposes monopolies because customers must choose where to purchase items, and no corporation must prevent competitors from joining a free enterprise.

Sources of monopoly power

1. Economies of Scale:If a firm's pricing structure is such that economies of scale are important, a single large business may be able to manufacture at a much cheaper price than other small and medium businesses. This allows the dominant company to cost other enterprises out of the market effectively. Because of economies of scale, several utility firms can dominate a market. This form of monopoly is referred to as natural monopoly. Furthermore, growing returns to scale indicates that as a company's size grows, its output (i.e., production per unit) grows and that it can offer the item at ever-lower costs.
2. Legal obstacles:The existence of legal entry obstacles such as trademarks, copyrights, licenses, etc., is the third source of monopolistic power. The authority frequently creates and enforces a monopoly through intellectual property protection regulations.
3. Barriers to entry:Barriers to entry are market features that prevent new enterprises from entering. They include economy of scale, geographical benefits, large sunk expenses, a dominating position in ownership of a few components needed to make the item, and legislative prohibitions. These obstacles may be interconnected, making access much more difficult. Although these obstacles may allow a single corporation to obtain and maintain monopolistic power over a market, there are frequently factors at work that might undermine this dominance.
4. Restrictions of government:Government bodies providing special rights to select corporate entities are another key source of monopolistic power. Authorities may also impose licensing and certification standards to enter an industry or profession. The government may also provide patent rights to creators of new goods or manufacturing techniques to promote innovation; these licenses may grant holders a level of monopolistic power throughout the patent's 17-year lifetime